How to Find Savings Through Landed Cost Analysis
As shippers adapt sourcing strategies to build redundancy, economy, and responsiveness into their supply chains, the complexity of drilling down total landed costs increases. Shippers often focus resources and attention on procurement, looking only at production and logistics spend. At a more granular level, a myriad of other factors can impact the total supply chain cost of moving a product.
For example, partnering with a contract manufacturer in China may be the cheapest alternative in terms of labor, but it doesn't factor in the anti-dumping cost—a protectionist tariff that countries impose on foreign imports they believe are priced below fair market value. This added expense may ultimately negate any production economies.
Other landed costs that often go unnoticed are commissions and royalties. If a shipper pays a commission to an agent, for example, and that agent then kicks back a certain percentage to a supplier as a referral, Customs may argue that the value of the shipped goods is more than what was declared on the commercial invoice. With import value adjustments such as this one, shippers often don't have the internal mechanisms to control or capture the necessary information.
The same problem occurs with the concept of assists. When high-tech or private label companies have a specialized or trademarked tool necessary to manufacture a product—i.e., a mold for a baking pan—or provide engineering assistance to manufacturers or suppliers, they must account for it when they declare their customs valuation. Shippers have to structure assists so that when they make a declaration, they're telling Customs, "my product costs $100, with one dollar's worth of assists, so I'm paying duties on $101."
Whether it's a matter of understanding global customs compliance standards such as assists, royalties, and commissions or country-specific anti-dumping and excise taxes, shippers should have a system in place that aggregates this data so they have a more accurate valuation or estimate of their landed costs. A global trade management (GTM) solution can automate the process of comparing total landed costs, providing shippers with full visibility into all associated costs and regulations. This enables shippers to make faster, better-informed sourcing decisions.
4 Ways to Reduce Total Landed Costs
- Sort out classification processes. Without proper classifications, it is difficult to manage correct duties. Many organizations believe their buyers have a proper understanding when they really don't. Creating better alignment with internal compliance teams can help ensure proper classification and more accurate calculations.
- Improve logistics costs estimates. Knowing trade lanes and the costs relative to those lanes provides more accurate estimates. Well-prepared companies use actual carrier rate contracts to determine total logistics costs as part of their estimate, and have global trade management processes in place to understand the cost implications of changing a trade lane, route, or mode.
- Understand Incoterms. People often see costs as linear, but they aren't. Freight and insurance may need to be included as part of a shipper's valuation when declaring duties in different countries. In the United States, for example, if you buy freight with CIF terms, you can reduce your valuation. If you're charged $100 on the commercial invoice, and the freight portion is $10, you pay your duty based on $90. This is not the case, in the European Union, however, where countries assume freight is always added.
- Recognize import valuations. Import valuations include everything that affects the final cost you expect Customs to see. Often these costs aren't immediately visible, as organizations tend to myopically focus on the purchasing aspect of inbound logistics—how to move goods, and the contract price. Using a global trade management solution that can filter and account for these extraneous expenses is often a good start.